EIU Global Forecasting Service

Russia's participation remains crucial to the OPEC production cut deal

January 18th 2018

Reinforcing the impact of the deal, Russia continues to abide by its promises for now. The country's crude oil production has remained below 11.3m barrels/day (b/d) since August 2017, equivalent to more than 100% of its pledged cut (albeit from a high baseline of 11.6m b/d set in October 2016). Although the authorities wavered ahead of the November OPEC meeting, they ultimately agreed to extend the agreement until end-2018—albeit with an option to review the deal in June—providing critical support for prices. Elsewhere, we expect compliance with the agreement over the next six to nine months to be mixed; growth in global oil prices will encourage weaker compliance among some OPEC member states that are under the heaviest pressure to boost oil revenue, including Iraq and Venezuela (although actual output in Venezuela will be constrained by its political and debt crises). Higher prices will also stimulate stronger output from Libya and Nigeria, although they have agreed to cap their production at (unspecified) 2017 levels. However, we expect the regional heavyweights, particularly Saudi Arabia and the UAE, to offset the impact of this through continued restraint.

Overall, OPEC and its key partners have shifted to a more pragmatic approach whereby they continue to bear short-term losses so that the global market can work through the excess supply. If participants were to abandon the agreement abruptly, this would bring about 1.8bn b/d of frozen production back on line, causing prices to sink again. We believe that OPEC producers would not be willing to accept this outcome, particularly as Saudi Arabia is seeking to bolster oil prices ahead of the planned sale of up to a 5% stake in the state-owned oil firm, Saudi Aramco, in 2018.